Introduction to Reverse Mortgages · 2020. 3. 28. · Downsizing with Liquidity. With a HECM for...

Finance of America Reverse | Slide 1

Introduction to Reverse Mortgages

Reverse Mortgages for Attorneys

Revised May, 2017


• Reverse Mortgage Basics• How the Program Works• Types of Products• Financial Assessment• HECM to HECM Refinance• Reasons/Uses for Reverse Mortgage Products• Financial Safeguards for Older Adults• Summary and Resources

Learning Objectives


Reverse Mortgage Basics


A reverse mortgage is a non-recourse loan that allows older adult homeowners (62+) to access a portion of their home equity.

This product is also know as a HECM, which is an acronym for Home Equity Conversion Mortgage

The borrower can access available equity as either:

• Upfront cash• Term or tenure payments• A line of credit• Any combination of these.

Reverse Mortgages

1980 Ken Sholen, Wisconsin Board of Aging, presents the concept to the government.

1989 FHA insures the first HECM, then observes the program closely.

1994 The first lenders are approved as HECM DE. Lenders can now underwrite their own loans.

1997 NRMLA is formed.

2000 Wall Street investors enter the market. Fannie Mae exits. Ginnie Mae now guarantees loans.

2015 Financial Assessment is implemented to ensure borrower obligations to taxes and insurance can be met.

Origins and History


Regulatory bodies and agencies include:

• HUD administers federal programs dealing with better housing and urban renewal. It was created in 1965.

• FHA is a government agency whose primary purpose is to insure residential mortgage loans.

• NRMLA is an association that serves as the national voice of the reverse mortgage industry, and acts as an educational resource, policy advocate, and public affairs center for lenders and related professionals. It was established in 1997 to enhance the professionalism of the reverse mortgage business.

Regulatory Bodies and Agencies

How the HECM Program Works

BorrowerTo qualify, borrowers must:• Be age 62 or older• Live in the house as their primary residence• Be able to pay property taxes, insurance, and property

maintenance costsPropertyEligible properties types include:• Single family homes• Two-to-four unit buildings the borrower owns and occupies• Manufactured homes that meet HUD requirements• FHA-approved condominiums

Initial Eligibility Requirements


FHA mortgage insurance provides lenders with protection against losses that result when homeowners default on their mortgage loans.

The lenders bear less risk because FHA pays a claim to the lender in the event of homeowner default.

FHA mortgage insurance protects the borrower if there is not enough money from the sale of the home to repay the loan in full. When that occurs, FHA Insurance pays the difference. This “non-recourse” feature ensures that the borrower is not liable for the difference between the sale price and the loan balance at the end of the reverse mortgage.

Note: Reverse mortgage proprietary products are not FHA-insured. Please ask for additional details.

FHA Insurance

IMPORTANT: The non-recourse feature is exclusive to FHA reverse mortgages.


The Principal Limit Factor (PLF) is based on three components:• The age of the youngest borrower, or non-borrowing

spouse if the non-borrowing spouse is under age 62.

• The Maximum Claim Amount (MCA), which is the lesser of the lending limit or the appraised value of the property.

• The chosen product, fixed or adjustable rate HECM.

Borrower Proceeds


Borrowers must retain sufficient equity to pay taxes and insurance throughout the life of the loan. To ensure this, disbursements at loan closing, and throughout the first 12 months, cannot exceed the GREATER of:

• 60% of the Principal Limit,Or,• Mandatory obligations (closing costs, repairs, etc.) plus

10% of the Principal Limit.

Benefit Limits

The cost to the borrower includes:• Traditional third-party closing costs• A possible origination fee• Mortgage Insurance Premium (MIP):o 2.50% of the MCA, if first year distributions exceed 60%

of available funds.o 0.50% of MCA if first year distributions are LESS than

60% of available funds.o 1.25% annually of the outstanding balance.

Costs


Government Oversight - CounselingIn order to protect consumers, HUD requires the following:• Prospective borrowers must receive counseling before

submitting an application for a reverse mortgage.• Counseling is conducted by independent, third-party

advocacy organizations and housing counseling agencies.• Counselors are HUD-approved, exam-qualified

professional housing counselors.• Borrowers receive documentation to prepare for the

session.

Types of HECM Products


HECM Product OptionsFHA-Insured Programs

The national lending limit is $636,150 for products that include:• Fixed Rate• Monthly Adjustable (10-point cap)• Annual Adjustable (5-point cap)

Proprietary HomeSafe® Product

FAR’s HomeSafe® jumbo product has a maximum loan amount of $2,250,000. HomeSafe® is only available as a fixed rate product.


HECM Proceeds DistributionFixed Rate ProductsFixed rate products permit lump sum distribution ONLY. This distribution cannot exceed the GREATER of:• Mandatory obligations plus 10% of the Principal Limit,Or,• 60% of available funds.

LIBOR Adjustable Rate ProductsThis is the most appropriate product for strategic planning purposes:• Distributions can be cash, term or tenure payments, line of

credit (HECLOC), or any combination of these.• The borrower can change the distribution method at any

time.• The product allows for partial future withdrawals.


The London Interbank Offered Rate (LIBOR) is the average interest rate the bank would be charged if it were borrowing from other banks. The leading banks in London estimate this interest rate.

LIBOR is the most important benchmark in the world for short-term interest rates.

LIBOR rates are calculated for 10 currencies and 15 borrowing periods, ranging from overnight to one year.

What is LIBOR?


LIBOR Line of CreditAdjustable rate HECMs offer a credit line growth rate, so the unused portion of the credit line increases. The growth rate is always the initial mortgage rate plus 1.25%. It compounds monthly, at the same rate as the loan balance.

Example: A 62-year-old borrower’s home in Las Vegas was worth $400,000 in 2006. At that time he qualified for a HECM LIBOR loan of $235,000. He left all cash proceeds in his line of credit and made no subsequent withdrawals.

His home lost value, and by 2011 was worth only $262,000. Because of the growth rate, his line of credit increased to $281,720 in 2011.


Tenure Payment: A tenure payment is monthly payments throughout the life of the loan.

Term Payment: A term payment is a set amount for a specified period of time.

LIBOR Tenure or Term Payments


Downsizing

Without a HECM for PurchaseSale price (old home) $500,000

8% closing costs $ -40,000

Net Proceeds $460,000

New Home Price $350,000

Funds remaining $110,000

Downsizing with LiquidityWith a HECM for PurchaseSale price (old home) $500,0008% closing costs $ -40,000Net Proceeds $460,000New Home Price $350,000HECM for Purchase $207,304Down payment $142,696(from sale proceeds)

Funds remaining $317,304

HECM for PurchaseA 70-year-old couple sells their home for $500,000, and purchase a new home for $350,000. They do not want any monthly mortgage payments.

HomeSafe®HomeSafe® is FAR’s proprietary, jumbo reverse mortgage, which is available for either single family homes or condos. HomeSafe® allows borrowers 62 and older to maximize home equity or access more loan benefits. It is available for both refinances and purchase transactions in several states, with new states added all the time.

The features of HomeSafe® include:• Maximum loan amount of $2,250,000• Lower fees, with no mortgage insurance premium• Fixed Rate• Flexible terms and underwriting• Required counseling and disclosures

Note: A separate training webinar on HomeSafe® loans provides more details.


Borrowers can choose to receive their reverse mortgage proceed as:• A line of credit• Monthly term payments• Monthly tenure payments• A combination of these• Fixed Rate: All funds up frontNote: Proceeds are not taxable because they are considered “home equity” rather than “income.”

Distribution of Proceeds


Reverse mortgages offer homeowners increased likelihood of meeting their retirement goals because they can:• Avoid selling assets to maintain cash needs during a bear

market.• Use funds to purchase a vacation property without depleting

significant amounts of assets.• Receive tax-free proceeds to assist with daily living expenses.• Use the proceeds as an emergency line of credit.• Use the proceeds to fund long-term care services. According to

studies, 58% of men and 79% of women will require some form of long-term care in their lifetime. The average cost of nursing home care, not including therapy, rehabilitation or medication is $94,000.

Meeting Retirement Goals


Strategic Usage of the HECM

“New academic research demonstrates how HECMs can play a vital role in retirement planning – not just as a tool of last resort but as a strategic way to provide greater financial flexibility to seniors with ample savings.”

Source: Salter, Pfeiffer and Evensky, “Standby Reverse Mortgages: A Risk Management Tool For Retirement,” Journal of Financial Planning, 2012.

Financial Assessment


Financial Assessment PurposeMortgagee Letters 2014-21 and 2014-22, which included the HECM Financial Assessment and Property Charge guide, were issued on November 10, 2014. FAR uses the Financial Assessment (FA) to evaluate whether a borrower qualifies for the HECM loan, and under what conditions. The FA specifically looks at “willingness” and “capacity” of the borrower to meet his or her financial obligations and meet HECM requirements.

• Willingness: Past performance and credit history.• Capacity: Using income, assets and expenses to calculate residual cash flow.

The Financial Assessment became effective, industrywide, on April 27, 2015.


Calculating Residual IncomeInclude all members of the household when you calculate family size, including non-borrowing spouse and any other individuals who depend on the borrower for support. Omit individuals who have a source of verified income, and do not rely on the borrower for support.

Refer to the table to calculate and enter Residual income by region.


Credit History SummaryFAR considers the following in the borrower’s overall pattern of credit behavior: • There are no tax arrearages in the last 24 months prior to loan application.

All property charges are current at application.• Homeowner insurance (and flood insurance, if applicable) was in place for

a minimum of 12 months prior to the date of application, and the borrower has a satisfactory history of maintaining it. FAR determines if the borrower paid insurance and taxes directly.

• There is a satisfactory payment history on mortgages, installment accounts and revolving credit, in that order.


Traditional Income SourcesFAR calculates and documents income for all borrowers. We then determine if the borrower has sufficient residual income equal to, or in excess of, the required amount, based on geographic region and family size, per the Residual Income tables on the previous slide. The analysis takes federal taxes into account, so non-taxable income cannot be “grossed up.”

The types of traditional income we consider include:• Employment income• Rental income• Pension/retirement benefits (based on period of continuance)• VA benefits• Social Security, disability, workman’s comp, public assistance


“Effective income” is income we can use to calculate residual income. It must be reasonably likely to continue through at least the first three years of the HECM, and includes:

Types of Income

• Employment• Employer Housing Subsidy• Commission• Self-Employment• Non-Employment sources• Disability Benefits• Alimony, Child Support and

Maintenance• Social Security Retirement• Pension

• IRA and 401K• Rental and other Real Estate

Holdings• Investment• Capital Gains and Losses• Expected Income• Trust Accounts• Annuities• Notes Receivable• Government Assistance and Case

Benefits


Asset Dissipation/Imputed IncomeImputed income is the amount of estimated monthly income available from the borrower’s assets after dissipation of liquid assets. Liquid assets can convert to cash within one year without payment of an IRS penalty.

FAR must use either 100% or 85% of the asset, based on the type of asset, and the table in the HECM Financial Assessment and Property Charge Guidelines, section 3.69.

If the borrower and a non-borrowing spouse or household member jointly hold the asset, we can count that asset if the borrower provides documentation that the he or she has unrestricted access to it.

You can do the calculation manually, in ReverseVision, or by using FAR’s Financial Assessment Worksheet. The underwriter will also calculate it.


Asset SourcesThere are a variety of sources that can be used to dissipate assets, including:

• Checking and Savings Accounts: We need a Verification of Deposit (VOD) and the most recent statement for each account.

• Cash on Hand: We need a Letter of Explanation (LOE) on how the funds were accumulated and the amount of time it took to save.

• Retirement accounts including 401Ks and IRAs: We need the most recent statement that verifies amounts and availability.

• Stocks and Bonds: We need the most recent brokerage statement for the most recent two months.

• Private Savings Clubs: We might require the club’s account ledgers and receipts, and verification that the club is still active.


Non-borrowing Spouse incomeNon-borrowing spouses (NBS) or other non-borrowing household members (ONBHM) might not need to provide income information. However, they can voluntarily provide income information.

We can use the NBS’s income to reduce the family size by one, or as a compensating factor, provided he or she discloses Social Security information and meets the same documentation and verification standards as the borrower.

Non-taxable income cannot be grossed up, and we do NOT include imputed income from dissipated assets.


Other Non-borrower IncomeOther Non-Borrower Household Members (ONBHM) are people who occupy the subject property, but are not the spouse of the borrower, and are also not borrowers.

ONBHM can voluntarily submit income documentation to demonstrate that they do not rely on the borrower for support. If they can prove that they have enough residual income based on one person for the applicable geographic area we can then reduce the family size by one.

The ONBHM must meet all documentation requirements. Non-taxable income cannot be grossed up, and we do NOT include imputed income from dissipated assets.


Other Non-borrower Income UsesWe calculate the other non-borrowing household member’s residual income to determine if he or she has enough income to help the borrower. We pull a credit report to see which obligations the non-borrower is responsible for.

We document income minus expenses for the ONBHM. We then compare that amount for one person in the area of the country of the subject property. If the individual meets or exceeds the required amount, we accept it as proof that the non-borrower does not depend on the borrower, and has enough income to pay his or her own expenses.


Other Non-borrower Income Uses• We CANNOT use the other non-borrowing household member’s income as a

compensating factor.• We do NOT use the credit history of either non-borrowing spouses or other

non-borrowing household members. We pull the credit report only to determine their obligations and calculate their residual income.

• We cannot combine the other non-borrowing household member’s income with the borrower’s income to help the borrower qualify.


Definition of LESAA Life Expectancy Set-Aside (LESA) is an amount withheld from the proceeds of the HECM loan for the payment of property charges during the borrower’s lifetime.

A LESA can be either fully-funded or partially-funded, based on a variety of factors.

When a LESA is necessary, it is one of the conditions of the HECM loan, and the borrower must qualify for enough principle limit to fund it. If the borrower is short to close, he or she brings funds to closing.


Definition of LESA, cont.We base our decision to require a LESA on the borrower’s ability to demonstrate a willingness to keep up financial obligations by examining:• Credit History• Property Charge payment historyWe also base our decision on the borrower’s ability to demonstrate the capacity to handle his or her monthly obligations by calculating:• Income• Expenses• Residual Income


Life Expectancy Set-AsideFor the fully-funded LESA, FAR calculates the amount of a LESA by first calculating the Projected Life Expectancy Property Charge Cost. This formula includes:• The projected sum of:o Current property taxeso Homeowners insurance premiumso Flood insurance premiums

• A factor to reflect increases in tax and insurance rates• The HECM expected average mortgage interest rate• Life expectancy of the youngest borrower, NOT the eligible non-

borrowing spouse.


LESA Formula CalculationFully-Funded LESA

The projected life expectancy property charge cost formula is:

(1.2 x PC ÷ 12) x {(1 +c)m+1 – (1+c)} ÷ {c x (1+c)m}• PC (Property Charges) ÷ 12 is the current total monthly property charge for

property taxes, homeowners insurance and flood insurance.• m is the TALC life expectancy in years of the youngest borrower x 12

Example: A 75-year-old borrower has a TALC life expectancy of 12 years, so 12 years x 12 months = 144 months.

• c is the monthly compounding rate, which is (the expected rate) + (the annual MIP rate) ÷ 12.

• 1.2 X PC ÷ 12 increases the amount of PC by a factor of 1.2 to cover expected increases in property taxes and hazard and flood insurance over the life expectancy of the youngest borrower .


Life Expectancy Set-AsideFor the partially-funded LESA, FAR calculates the amount of a LESA by first calculating the Residual Income Shortfall. This formula includes:• The Residual Income Shortfall amount. The shortfall is the difference between the

borrower’s monthly residual income and the standard residual income for the borrower’s geographic region and family size, based on the Table of Residual Income.

• A factor to reflect increases in tax and insurance rates.• The HECM expected average mortgage interest rate.• Life expectancy of the youngest borrower, NOT the eligible non-borrowing spouse.If the partially-funded LESA is 75% of the calculation for a fully-funded LESA, or less, FAR must set aside the entire fully-funded amount.

Also, borrowers with zero or negative residual income might not qualify for the HECM loan if they still have insufficient residual income after we subtract their property charges from the calculation.


LESA Formula CalculationPartially-Funded LESAProjected Life Expectancy Property Charge Cost =

(1.2 x MRIS) x {(1 +c)m+1 – (1+c)} ÷ {c x (1+c)m}• MRIS (Monthly Residual Income Shortfall) is the residual income gap, or the difference

between the borrower’s monthly residual income, and the required amount of the residual income for the geographic area and family size using the Table of Residual Income.

• m is the TALC life expectancy in years of the youngest borrower x 12. So, for a 75-year-old borrower, TALC life expectancy is 12 years x 12 months = 144 months.

• c is the monthly compounding rate, which is (the expected rate) + (the annual MIP rate) ÷ 12.

• 1.2 x MRIS ÷ 12 increases the amount of MRIS by a factor of 1.2 to cover expected increases in property taxes and hazard and flood insurance over the life expectancy of the youngest borrower .


LESA: Fully or Partially-FundedFully-Funded LESAFAR always requires a fully-funded LESA when a borrower does not demonstrate the willingness to meet financial obligations. This is true even when the borrower has enough residual income to demonstrate the capacity to meet them.FAR uses HECM proceeds to pay property taxes and insurance premiums to the respective entities on behalf of the borrower.

Partially-Funded LESAWhen FAR determines the borrower has demonstrated the willingness to meet financial obligations, but has not demonstrated the capacity to do so, the LESA must be partially-funded.

IMPORTANT: FAR disburses semi-annual payments to the borrower from HECM proceeds when a LESA is partially funded. The borrower must use these funds to pay property taxes and insurance premiums, and remains responsible for timely payment of all property charges.

HECM to HECM Refinance


During refinance of an existing HECM loan, the date of FHA case number assignment for the new HECM must be at least 18 months after the closing date of the prior HECM.

Seasoning Requirement


Three Tests to QualifyIn addition to the seasoning requirement, the borrower must meet three additional tests, UNLESS he or she sends a written request for a new HECM in order to:

• Add a non-borrowing spouse (NBS).

• Add another family member residing in the subject property to the loan.

Note: All persons added must meet age and other HECM qualifications.

We conduct this test to determine that the “refinance factor” is sufficient. This is the increase in the borrower’s principal limit from the prior HECM to the new HECM. It must equal or exceed five (5) times the borrower’s closing costs.

In this example, the refinance factor is greater than 5, so it is sufficient.

Closing Cost Test

Principal Limit Increase ÷ Closing Costs = Refinance Factor

Closing Costs $6,500

Principal Limit Increase $33,800

Refinance Factor ($33,800 ÷ $6,500 = 5.2) 5.2



The Principal Limit from the new refinancing HECM, minus closing costs and the remaining balance on the prior HECM, equals the Available Benefit amount on the refinancing HECM.

The available benefit amount must equal or exceed 5% of the HECM refinance Principal Limit. In this example, the benefit percentage is 11.75%, so the borrower qualifies.

Loan Proceeds Test

1. HECM Refinance Principal Limit – (Closing Costs + Prior Loan Balance) = Available Benefit2. Available Benefit ÷ HECM Refinance Principal Limit = Benefit Percentage

HECM Refinance Principal Limit $200,000

Closing Costs $6,500

Prior HECM Loan Balance $170,000

Available Benefit Amount $23,500

Benefit Percentage ($23,500 ÷ $200,000 = 0.1175) 11.75%


Loan Type TestChanging the product type in a HECM refinance loan does NOT BY ITSELF provide a bona fide advantage to the borrower. The loan must also meet the requirements of either the Closing Cost Test or the Loan Proceeds Test.

A change in loan type includes, but is not limited to:

• A change from a fixed rate to an adjustable rate loan.

• A change between a monthly and an annual adjustable rate loan.

• A change in rate cap.

All HECM to HECM refinance loans must adhere to these requirements.

Reasons/Uses for a Reverse Mortgage


According to the Boston College Center for Retirement Research:• Fifty-three percent of households are “at risk” of not having

enough to maintain their living standards during retirement.• A reverse mortgage lowers that risk.

Biggest FearThe biggest fear during retirement is “running out of money.”


Common Questions

“Does the lender take ownership of the home?”A reverse mortgage is a loan. The homeowners retain full ownership.

“Can I be forced to leave my home?”Homeowners can stay in the home until a loan maturity event occurs, such as death, moving out, or selling the home. The property must be the homeowners’ primary residence. The homeowners must pay taxes and insurance, and must maintain the home. If they do not, the loan becomes payable.


“What are the borrower’s options?”To terminate the loan at any time, whether or not it is due and payable, the borrower can:• Pay the mortgage debt in full, and retain ownership of the

property.• Sell the property for at least the lesser of the mortgage

debt or the appraised value.

When the mortgage is due and payable, the borrower or estate can: • Repay the debt in full to retain the property. Lenders can

assist the borrower (or estate) in obtaining other financing to pay off the HECM loan.

• Sell the property for at least the lesser of the unpaid mortgage balance, or 95% of the appraised value.

Common Questions


“Must my home be ‘free and clear’ to obtain a reverse mortgage?”No. However, you must have enough equity in the home to pay off any existing loans.

“Can I ever owe more than my home is worth?”The HECM is a “non-recourse loan.” This means that the HECM borrowers, or their estate, will never owe more than the loan balance or value of the property, whichever is less.

In other words, with a non-recourse loan the borrowers (or their estate) can pay the loan balance when it comes due. If they do not, the lender’s only remedy is to foreclose. The borrower is not personally liable for any loss resulting from the foreclosure.

Common Questions


“How can a reverse mortgage help?”Older adult homeowners have an increased probability of meeting their retirement goals with reverse mortgages because they can:• Avoid selling assets to maintain cash needs during a bear

market.• Use funds to purchase a vacation property

without depleting significant amounts of assets.• Receive tax-free proceeds to assist with daily

living expenses.• Use the proceeds as an emergency line of credit.• Use the proceeds to fund long-term care services.


Long-Term CareClients can use HECMs to address long term care planning, which is a concern for older Americans.

• “Obamacare will not impact long term care planning, and makes no changes to long term care insurance.”~American Association for Long-term Care Insurance

• “58% percent of men, and 79% of women will require some form of long term care in their lifetime.” ~ National Insurance Institute

• Average cost of nursing home care, not including therapy, rehabilitation or medication: $94,000

Source: John Hancock’s 2013 Cost of Care Survey


Your clients can use a reverse mortgage as:• A fixed income retirement planning product.• A risk management tool that enables them to retain

ownership of their home.• An option to extract home equity, as opposed to

liquidating other assets.• A supplement to investment income.• A hedge against declining real estate values.• A component of Social Security planning.• A way to manage tax liabilities.• New home purchase.

Reverse Mortgages

Source: Borrower survey conducted in August 2012 on behalf of National Reverse Mortgage Lenders Association (NRMLA) by ORC International, a global market research firm

Common Uses

Financial Safeguards for Older Adults


Why is this topic important?

This issue is important to you personally and professionally.

We, as professionals who advocate for older adults, are in a position to observe potential problems and concerns. Fighting fraud and financial abuse is a responsibility we must take seriously.

Above all, assisting older adults is the right thing to do.


Types of Financial AbuseFraud: A deception deliberately practiced in order to secure unfair or unlawful gain.Scam: To swindle by means of a trick. ~The American Heritage Dictionary

There are three types of abuse:• Occasion/Opportunity: The perpetrator wants something the older adult has, and

seeks to take it.• Desperation: Family, friends or caregivers become so desperate their morals or

character become affected. They rationalize the act against the older person, or feel entitled to take from that person because they have provided some type of assistance.

• Predation: This is typically premeditated – “predatory” – and often comes in the form of a scheme that might be very sophisticated. The activity is planned and detailed, and often scripted to prey on the goodness and values of older adults.


Reverse Mortgage ProtectionsHow has the Reverse Mortgage Industry Protected Seniors Against Elder Abuse?The reverse mortgage industry has been regulated by the government since 1989. Because of this, lending institutions have a variety of safeguards that protect older adults from financial abuse.

Older homeowners may be targets for scam artists who offer too-good-to-be-true real estate or investment deals. Sadly, there are also cases where seniors are talked into a reverse mortgage by family members who want to get their hands on the cash.

That’s why reverse mortgage counseling is so critical. The counselor will help you look at the long-term responsibilities of a loan, not just the short-term benefits.

Older adults should always avoid any unsolicited offers for a reverse mortgage, or for help with these loans. If you suspect that someone has been targeted by a scammer, call 800-347-3735 to file a complaint with HUD.


Home Equity Reverse MortgageBenefits and Safeguards There are many financial resources and products available to benefit older adults and enhance their financial security.For example: A HECM (or Reverse Mortgage) is one of the products available to older adults aged 62 or older, which provides monetary resources through the equity available in their home.• Prospective clients are required to receive third party counseling.• Mortgage Insurance is incorporated into the program to protect the

client.• The amount of equity a client can use is limited based on age,

product and interest rate.

Appendix


• ARM: Adjustable Rate Mortgage. A HECM with an interest rate that is subject to adjustments.

• FHA: Federal Housing Administration. • Fixed Rate HECM: A HECM loan with an interest rate that does

not change for the life of the loan.• Good Faith Estimate: A list of the approximate closing costs to

obtain a loan.• HECM for Purchase: A HECM that helps finance the purchase

of the borrower’s principal residence.

Glossary


• HUD: US Department of Housing and Urban Development.• Lender: A bank or institution licensed to originate

residential mortgage loans.• LIBOR: London Interbank Offered Rate. The average

interest rate that leading banks in London charge when lending to other banks. It is the index used for adjustable rate HECMs.

• LOC: Line of Credit. Also called a “credit line.” The borrower chooses how much money to borrow from the HECM loan, and when to borrow it.

Glossary, cont.


• Lump Sum: A distribution method that gives the client all proceeds at once at loan closing.

• MIP: Mortgage Insurance Premium. Protects the borrower and lender if the loan balance grows higher than the home value.

• NRMLA: National Reverse Mortgage Lenders Association. The national voice of the reverse mortgage industry, founded in 1997. It serves as an educational resource, policy advocate, and public affairs center.

Glossary, cont.


Glossary, cont.• Non-Recourse Loan: A HECM loan provision that states

a borrower or the borrower’s heir will not be responsible for more than the sale price of the home, or the loan balance, whichever is less.

• Originator: The person or firm that originates a loan on behalf of the borrower.

• Principal Limit: The lesser of the home’s appraised value or the FHA 203b HECM lending limit of $679,650.

• Proprietary Reverse Mortgage: A non-HECM reverse mortgage that is owned by a private company.


• Reverse Mortgage: A home loan for older clients that is based on home equity. It does not need to be paid back until the borrower moves out of the property, sells it, fails to pay taxes and insurance or maintain the property, or dies.

• Right of Rescission: A time period of three business days after loan closing during which the borrower has the right to revoke the loan.

• Servicing: The maintenance of the loan after loan origination. It includes providing regular statements, updating information, and providing funds to the borrower on request.

Glossary, cont.


• Tenure Payments: Monthly payments throughout the life of the loan.

• Term Payments: Monthly payments for a specified period of time.

• TALC Rate: Total Annual Loan Cost Rate. The estimated cost of the loan expressed as an annual rate.

Glossary, cont.


ResourcesFamiliarize yourself with these resources.• National Committee for the Prevention of Elder Abuse

www.preventelderabuse.org• National Do-Not-Call registry at www.donotcall.gov or 888-382-1222• National Fraud Information Center-Internet Fraud Watch

www.fraud.org 800-876-7060 • www.nrmla.org – National Reverse Mortgage Lenders Association• U.S Postal Inspection Service

www.usps.com/postalinspectors/fraud/seniorwk.htm• Better Business Bureau Wise Giving Alliance www.give.org 703-276-0100 • American Institute of Philanthropy www.charitywatch.org 773-529-2300• AARP www.aarp.org/bulletin/consumer 888-687-2277• Local Adult Protective Services (refer to your state’s Department of

Human Services)

http://www.preventelderabuse.org/

http://www.donotcall.gov/

http://www.nrmla.org/

http://www.usps.com/postalinspectors/fraud/seniorwk.htm

http://www.give.org/

http://www.charitywatch.org/

http://www.aarp.org/bulletin/consumer


RMS Name: ___________________________________

Title: ____________________________________

NMLS#: _______

Phone: ______________

Email: ________________________________

This presentation was created by Finance of America Reverse LLC (FAR) Learning and Development

Introduction to Reverse Mortgages · 2020. 3. 28. · Downsizing with Liquidity. With a HECM for...

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